A significant obstacle to the dynamic nature of African international commerce is that only thirty percent of trade volumes use banks as financial intermediaries. Because their larger competitors take up most of the available funding, small and medium-sized businesses (SMEs) suffer disproportionately from this stark funding gap.
The potential to transform commerce between Africa and other countries is evident when one considers the enormous yearly value of international trade volumes, which amount to $1.2 trillion. More critically, the necessity for entrepreneurs that can capitalize on this unexplored market is highlighted. To support the expansion of African cross-border commerce, FrontEdge, a fintech company located in Lagos, has secured $10 million in a loan and equity seed round, with the former providing more than 70% of the total.
FrontEdge, established in 2021 by Moni Alli, gives SMEs that export and import the working capital and IT solutions they need to make cross-border and international transactions easier. The former McKinsey consultant has spent the last ten years brainstorming ways to bridge the funding gap for African SMEs. She drew on her experience working on digital transformations for tier-one banks, especially in Nigeria, South Africa, and Morocco. The creator, who formerly had a private equity position at Development Partners International (DPI), tells TechCrunch in an interview that FrontEdge results from his expertise.
I believe the outcome of the extensive time I spent counseling banks on SME financing was that the balance sheet was mainly geared toward large corporations. After earning his MBA at Harvard Business School, Alli launched the firm. “The financing process in banks is outdated; you have collateral-based lending, which means underwriting a SME can be deemed unprofitable,” Alli stated.
Therefore, digitizing these procedures and customizing them for SMEs makes sense; this was the recommendation I made before, resulting in FrontEdge. We primarily concentrated on SME exporters from Africa. We observed a significant funding vacuum in that area of cross-border commerce and the potential to essentially guarantee transactions across national borders.
FrontEdge’s problem is seen in the pre-funding strategy of agri-commodity traders, for example. These dealers provide smallholder farmers with advances, managing the 60-day process from storage to delivery. After that, payment is not made until the products arrive at their destination, which might take 40 to 60 days, depending on the jurisdiction. For exporters, this causes a large financial tie-up over a 120–180-day period.
In contrast to banks, FrontEdge offers these exporters upfront funding based on transaction-based underwriting without requiring collateral. However, according to Alli, the timing of its interventions changes according to the risk it is willing to take. He claims that the startup usually works with goods that are actually on a vessel or occasionally at the warehouse, with average payment terms of 60 to 90 days. This enables fintech to bridge the working capital gap, which speeds up receivables and permits exporters to conduct more business.
Although FrontEdge started as a lending-only platform, it has since become more comprehensive. It is integrated with many databases to underwrite buyers’ offshore creditworthiness and offer insights into the dynamics of cross-border trade between buyers and sellers. The firm saw that these companies were getting dollar flows after completing many deals last year and saw an opportunity to solve issues with capital restrictions and excessive fees inside the banking sector. Because many of these exporters use naira as their native currency, fintech provided further help by making it easier to open up offshore accounts abroad and convert dollar revenues into that currency.
FrontEdge, which functions as a vertical bank (offering financing, cross-border payments, and offshore accounts) catering to African traders’ requirements, subsequently names companies like JP Morgan and Providus Bank as partners on its digital platform. It offers exporters technological solutions such as document management, shipping insurance, and logistical management to supplement its financial services. Freight forwarders like Jetstream and Send are among the company’s nearby rivals in Africa; others with comparable business plans, such as Mundi and Marco Financial, target external markets like Latin America.
It’s a volume game, and with the narrow margins, the goal is to basically execute as many deals as possible. According to the CEO, “What you see in Europe and other jurisdictions is that these traders are given this financial support, which means that they can be more competitive and give longer payment terms to their buyers offshore.”
Thus, we give African exporters the resources and equipment they need to compete with exporters from South America, Europe, or the United States. Price and product quality are the only factors for these significant purchasers. Thus, we can provide them with funding at conditions they can provide, allowing us to level the playing field with many of these purchasers worldwide.
FrontEdge says that since its introduction, its clients, SME exporters, have increased by 20% per month and have tripled their sales on the platform. The variety of transactions the organization funds generates its income. Alli reiterates that FrontEdge prioritizes preventing losses and proving successful repayments, but she withholds information on the company’s revenue growth. FrontEdge says that after completing more than 50 contracts, each including several transactions and invoices, it has so far recorded a 0% default rate.
In order to diversify its revenue streams beyond financing, FrontEdge intends to hire more personnel, expand its financing product throughout Nigeria, Ghana, Ivory Coast, and Kenya, and introduce new products with the help of its capital from lead investor TLG Capital and other backers, including digital freight forwarder Flexport. “TLG is pleased to assist FrontEdge in its endeavors to foster the growth of African SMEs, acting as a vital link to grant financial empowerment and capital access to African exporters. We think the government will carry out the plan, and FrontEdge is ideally positioned to address a critical issue that has to be resolved for African traders to participate in international commerce,” stated Johnnie Puxley, an investment specialist at TLG Capital.